If you’re even mildly Keynesian, you know that downward nominal wage rigidity occasionally leads to lots of involuntary unemployment. If, like most Keynesians, you think that your view is backed by overwhelming empirical evidence, I have a challenge for you: Explain why market-driven downward nominal wage rigidity leads to unemployment without implying that a government-imposed minimum wage leads to unemployment. The challenge is tough because the whole point of the minimum wage is to intensify what Keynesians correctly see as the fundamental cause of unemployment: The failure of nominal wages to fall until the market clears.
Links omitted. Read the whole post. My thoughts:
1. In my long essay, which is worth re-reading, I write,
it is politically consistent for someone on the left to believe that a rise in the minimum wage would not reduce hiring and also that more immigration would not depress wages. Analytically, however, these are opposite views. The minimum-wage increase will not reduce hiring if one treats labor demand as highly inelastic (so that a small change in hiring will be associated with a given change in wages). Increased immigration will not depress wages if one treats labor demand as highly elastic (so that a large change in hiring will be associated with a given change in wages). I think we are already starting to see economists opt for political consistency at the expense of analytical consistency.
2. On the point about downward rigidity of nominal wages as essential for unemployment, that has long been controversial. The mainstream view, particularly in textbooks, is that downward wage rigidity is important. But often it is difficult in the data to find the movements in real wages that would one expect to be associated with fluctuations in employment. And some Keynesians (including Keynes himself) have claimed that rapid wage reductions in a time of high unemployment would not reduce unemployment.
I do not wish to revisit the Keynesian macro controversy here. My main point is that economists are willing to take analytically inconsistent positions in order to remain politically consistent. Bryan wants to call them on it, but I think that the trend is against him.